(1) Field of the Invention
The present invention relates generally to electronic trading systems and, more particularly, to a system for multi-lateral netting of bilateral trades of OTC derivatives.
(2) Description of the Prior Art
Financial derivatives are contracts of which the price/value of the contract varies with the value of an underlying instrument. Financial derivatives can either be standardized contracts traded on a recognized Exchange or OTC traded. OTC derivatives are individually negotiated and tailor-made between two counterparties (so called “over the counter (OTC) transactions”). The parties do their own valuation of the contracts both when dealing as well as later on when establishing the market value of their contracts during their life.
Participants in the OTC markets are banks, investment banks and other financial institutions. The International Swap and Derivatives Association is a trade organization for dealers active in the OTC derivatives market. An OTC derivative transaction allows the financial institution to manage its market risk positions, either for the purpose of hedging or for the purpose of deliberate position taking to make a profit from an expected change in market prices. Derivatives allow the market risk of substantial amounts to change hands without the need and associated costs of transferring the underlying values.
A thorough discussion of other aspects of OTC derivatives may be found in U.S. Published Patent Application 2003-0083978 entitled “System and method of implementing massive early terminations of long term financial contracts” by Brouwer which is hereby incorporated by reference in its entirely.
However, because of the volume of trade, it is often possible that the counterparties involved have off-setting trades which, if “ripped up” prior to the confirmation process, can result in reduction of costs to the counterparties such as reduction in economic and regulatory capital usage; and reduction in counterparty risk exposure. As can be appreciated, offsetting bi-lateral trades between just two counterparties is a simple process. However, offsetting or netting trades between a plurality of individual, segregated counterparties to provide for multi-lateral netting is more complex.
Thus, there remains a need for a new and improved electronic netting system which provides netting of bilateral trades while, at the same time, is operable to provide optimized, multi-lateral netting among a plurality of individual, segregated counterparties.